Memo to Hollywood: Downloading can't be stopped

March 6, 2002 Posted: 1536 GMT

By Eric Hellweg

NEW YORK (CNN/Money) -- I can't believe I'm writing this article in 2002. When I started covering digital music in 1996, the record industry was grappling with the same fundamental issues it confronts today.

Sure, the names and faces have changed, and the numbers are bigger, but the industry still doesn't seem to understand the potential upside of online music, and it still can't stop calling 60 million of its consumers "criminals."

In fact, the industry chose to make its grandest consumer chastisement on its biggest night of the year: the Grammys. Michael Greene, CEO of the National Association of Recorded Arts and Sciences (NARAS), stood in front of the TV audience and proclaimed, "The most insidious virus in our midst is the illegal downloading of music on the Net....This illegal file-sharing and ripping of music files is pervasive, out of control, and oh-so-criminal."

I'm afraid he's oh-so-wrong. "Mr. Greene doth protest too much," says Yankee Group analyst Steve Vonder Haar. (Forget the fact that Greene doesn't even fully understand the terms of the debate; in a Feb. 26 appearance on Politically Incorrect, Greene kept talking about the "$3.6 billion we've lost from ripping." Note to Mike: The term you're searching for is "downloading," not "ripping.")

The recording industry's "most insidious virus" appears to be the major record labels' misguided belief that they have the inalienable right to parlay their offline businesses into similarly dominant ones on the Internet -- and their steadfast refusal to accept any other possibility.

And guess what: That offline model doesn't look so hot these days. In favoring hit singles and clone acts (acts rushed to market to capitalize on the popularity of similar-sounding stars) over established artists, the major labels are flooding the market with mediocre $18 CDs that typically feature one decent track, maybe two. With feature-length DVDs retailing for a little more than half that, who can blame consumers for wanting to opt out of the CD purchase?

To make matters worse, the industry is turning to Washington for a bailout. Most absurd among its proposals to Congress is the Security Systems Standards and Certification Act (SSSCA), sponsored by Fritz Hollings (D-S.C.), which would force computer equipment companies to install government-sanctioned copy protection on all hardware and consumer electronics devices.

Does Hollings really believe consumers will let the government decide what kind of hardware goes into their PCs and iPods? Such a move would, as Intel (INTC: down $0.29 to $32.41, Research, Estimates) executive vice president Leslie Vadasz said during a preliminary hearing on the matter, "substantially retard innovation, investment in new technologies, and...reduce the usefulness of our products to consumers."

Instead of trying to rewrite copyright law, the labels should instead brush up on the laws of supply and demand.

What's an outfit like Vivendi Universal (V: up $1.05 to $42.30, Research, Estimates) -- the parent company of the biggest music label, Universal Music Group (UMG: Research, Estimates) -- to do at a time when overall record sales are down (10 percent in 2001) and blank CDs are selling almost as briskly as recorded ones? Vivendi's music operation was recently the only part of the company to report a pro forma loss, and since the division accounts for nearly 13 percent of Vivendi's total revenues, it is hardly a group to be ignored.

Vivendi and others don't need Washington's help. What they need is to embrace some radical thinking. Face it: Downloading can't be stopped. Washington can't stop it. The Recording Industry Association of America can't stop it. The sooner the labels accept this and plan for it, the brighter their prospects.

The industry needs to start learning to do the right thing by consumers and artists, or it will find itself even worse off than it is right now. Rough times lie ahead for companies like Vivendi Universal, but they have the power to make it a much brighter future. Doing so, however, requires letting go of the past.